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Republic of Serbia: First Review Under the Stand-By Arrangement—Staff Report

Summary: KEY ISSUES Recent economic developments. The economy is slowly emerging from the 2014 recession, benefiting from low oil prices and the euro area recovery, which have helped to contain the short-term effects of fiscal consolidation. However, growth is only expected to return in 2016. Inflationary pressures remained subdued on account of low import prices and widening output gap. Program status. The new 36-month Stand-By Arrangement (SBA) with access of SDR 935.4 million (200 percent of quota, or about €1.2 billion) approved on February 23, 2015 is broadly on track. All end-March performance criteria (PCs) and indicative targets were met. The structural benchmarks were all completed with delay reflecting implementation difficulties, particularly in the area of state-owned enterprises (SOEs). Completion of the review will make available the cumulative amount of SDR 304 million. The authorities intend to continue treating the arrangement as precautionary. Policy recommendations. Continued efforts in advancing the agreed structural reforms, particularly for SOEs, and pursuing the planned fiscal consolidation are critical to achieving macroeconomic stability and sustainable long-term growth. New program commitments. Three prior actions were established regarding the adoption of the financial restructuring plan for the electricity company Elektroprivreda Srbije (EPS), introduction of excise tax on electricity, and increase in electricity tariff. These prior actions were met in early June. The end-June structural benchmark on the Local Government Financing Law is proposed to be reset to end-September. New benchmarks are set in the area of nonperforming loan (NPL) resolution.